LME launches two consultations on reforms in wake of nickel crisis

London Metal Exchange. (Image by HM Treasury, Flickr.)

The London Metal Exchange (LME) launched two consultations on Wednesday on possible reforms in the wake of last year’s crisis in nickel trading, saying it was following up on an action plan set out in March.

The move is part of sweeping reforms to boost investors’ confidence in the wake of last’s year’s crisis, when the exchange suspended trading and annulled billions of dollars of deals.

“These consultations represent our first formal market-wide engagement on the initiatives laid out in our action plan earlier this year,” LME chief executive Matthew Chamberlain said in a statement.

The LME launched its action plan in March in response to January’s report by management consultants Oliver Wyman, which advised the LME on how to prevent future market distortions and improve risk monitoring.

The first consultation will be on a requirement for warehouses to report the amount of all stored metal, even material that is not registered for delivery in connection with futures contracts.

The LME, owned by Hong Kong Exchanges and Clearing Ltd, already requires some reporting of so-called off-warrant inventories, but the proposal would expand this.

A warrant is an ownership document for metal stored in LME warehouses that is available for delivery against futures contacts. Large movements of metal from off-warrant to on-warrant status can produce sharp fluctuations in LME prices.

The world’s oldest and largest market for industrial metals would also seek to make permanent reforms introduced after the nickel debacle to address low stock levels.

The temporary reforms – a backwardation limit and deferred-delivery mechanism – have helped prevent distortion at the front end of the price curve, the LME has said.

A second consultation would change the way closing prices are determined, which would move to a more “industry-standard” methodology, the LME said.

The existing VWAP (volume weighted average price) methodology would be expanded to include more contacts in aluminum, copper, lead nickel and zinc.

The consultations are due to close on June 30 and July 14.

(By Eric Onstad; Editing by Jan Harvey and David Holmes)


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